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  • Writer's pictureRich Arzaga

Your rental property and the Maui fires

Imagine your real estate wealth-building plan is to purchase a handful of short-term rental properties in Hawaii. The long-term promise of high demand and solid revenue helps assure you that this is a good idea. You are going all-in on Hawaii and the leisure market. 

But then there is a devastating fire. 

Fortunately, your rentals were spared. In fact, the demand for your properties has never been better. But, you may not have survived this fire after all.

This article delves into the legislative risks that can impact your real estate investments: Maui is considering banning short-term rentals. This change can render your investment strategy obsolete. What could you have done differently? Legislative risk (and other risks like local market, employer, and market sector) underscore the need for a diversified real estate portfolio.

One of the main lessons is that there are ways you can mitigate these risks from impacting your entire rental portfolio.

Asset allocation, a key concept in investment, addresses the question of diversification. It advocates for not putting all your eggs in one basket, but rather, spreading your investments across different properties and locations.

There are a few different ways to asset allocate with investment property.

  • By location. Not all of your properties must be in one city or island. Ideally, your properties are located in different parts of the country. You can hire professional management if you are concerned about not being within driving distance of your property. As you age, getting more passive becomes more important. Hiring an experienced manager can help solve that problem. And besides, living close to your investments is not fundamental to sound investing. After all, do you live close to all the companies in which you own stocks and bonds?

  • By property type. There are many property types. The core ones include residential, office, warehouse, industrial, and retail. Other types are data centers, self-storage, churches, schools, and billboards (yes, billboards are real property). There are many more.

  • By age. Mixing older with newer, or class A with class B and C, is an excellent way to hedge against risk and the cost of maintenance. If purchased properly, lower-class properties tend to have better cash flow. If maintained properly, they can generate cash flow for years.

  • Debt or no debt. Debt adds risk to a portfolio. Investors can manage this by employing various debt ratio levels or no debt. Lower debt allows an investor to help survive that property or portfolio's worst day.

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